Sarah Thompson
Welcome to Powering Sustainable Ideas, a podcast series from RBC Capital Markets where we interview the leaders and companies powering the sustainable future. My name is Sarah Thompson, and I'm the Global Head of Sustainable Finance at RBC Capital Markets. And in this episode, we'll discuss the key themes that will shape the sustainable finance market in 2025. Joining me are my colleagues, Moses Choi, US Head of Sustainable Finance, and Stefano Vitale, European Head of Sustainable Finance. And before we start, I thought it would be important to acknowledge how this space has evolved over the last several years as context for our conversation today. While the concept of integrating environmental, social and governance, or ESG, as we call it, considerations into investment decision making has been around for decades now, ESG really started to gain momentum in 2015 as we saw a flood of sustainable funds coming to market and things like ESG ratings and indices becoming more prevalent in the capital markets. The interest in ESG really peaked in 2021 with record flows into those sustainable funds and the highest number of mentions in earnings calls. But since then we've seen greenwashing concerns rise, we've seen new regulations emerge, and we've seen a politicization of ESG, which have all resulted in a backlash. Despite these tensions, the sustainable finance market continued to grow in 2024, with sustainable assets under management reaching $2.5 trillion, and sustainable bond issuance surpassing $9.2 trillion. Also, our institutional and corporate clients tell us that they remain committed and that they continue to advance their sustainability strategies, even if they aren't publicizing them or using the term ESG to describe their various initiatives. Really with this backdrop in mind that we have identified five key themes that we think will reflect the ongoing evolution of the sustainable finance market in the year ahead, but also beyond. With that, maybe we can start digging into our first theme, which does really focus on this very complex and evolving landscape and what it means for corporate sustainability action. So Moses, with political attacks on ESG intensifying under the Trump administration, can you talk us through this highly dynamic space and what it means for corporate ESG commitments?
Moses Choi
Thanks, Sarah. I wanted to underscore something you just said. I just wanted to remind the audience that sustainable investing for asset managers on one side, and corporate sustainability management for companies or institutions on the other has really been a long standing management discipline aiming to deliver long-term value creation. Investors and companies are still very focused on long term value creation, despite the political pendulum swings to the left or now to the right. With that said, the start of the year has been clearly a whirlwind here in the US. Within hours of Trump taking office, he launched dozens of executive actions, setting in motion the withdrawal from the Paris Agreement for the second time, an immediate pause on disbursements under the IRA. We've also had a US SEC Acting Chairman signal its intent to abandon the Climate Disclosure Rules that were proposed on the previous administration and the DOJ coming after DEI initiatives for private companies. Some have described what's going on here in the US as a ‘flooding the zone strategy’ that includes simultaneous action on tariffs, inflation, immigration, crypto, AI, DOGE, Ukraine, etc. One thing I should say is that Trump's actions are generally consistent with what he campaigned on, but the velocity of change and the uncertainty that it creates makes managing and advancing corporate climate commitments quite challenging. What's more here in the US is that companies must also contend with conflicting signals from politicians in red or blue states. And so it's really no surprise that we're seeing some companies green hush, revise, and sometimes remove altogether certain public corporate targets or commitments. At the same time, there's really a bright line here. There are some fundamental drivers that are creating continued momentum towards sustainable business models, regardless of the terminology used to describe them. First, globally capital flows and investments suggest a strong commitment to sustainable investing and energy transition. And last year, in 2024 energy transition investment hit a record of $2.1 trillion of investment. Second, there's an ever increasing awareness of climate risks. In the last six months alone, here in the US, we saw three of the most devastating natural disasters in history, with climate being a contributory factor. Third, recent research from Harvard showed that 45% of US public companies, representing some $8 trillion of market cap have mentioned in 10k filings developing or selling climate solutions, which is up from 20% in 2005. So as we navigate this new landscape, one thing is clear, while the political pendulum swings, the fundamental case for sustainability remains resilient, though an increasingly complex endeavor. Stefano, I know our audience would appreciate a European perspective. what are you seeing across the pond, and how does the recent EU omnibus proposal change the regulatory landscape?
Stefano Vitale
I think the recent omnibus that was introduced the European Commission has really stirred up the European situation in the sense that Europe has been leading on sustainability disclosures for a while, and especially large companies have really ramped up their readiness to disclose under a number of green regulations ‒ I'm referring to the EU taxonomy, the Corporate Sustainability Reporting Directive and, the Corporate Sustainability Due Diligence Directive. And the fact that the EU have effectively removed the requirement for around 80% of European companies to disclose on their ESG performance created a lot more ability to compete for these small and medium sized European businesses. But on the other end, when you think about large businesses, clearly created a step back in that sense, because they were really relying on the ability of these small businesses being able themselves to report on their, for example, supply chain. I think that is really pointing to a flex in the European market and bringing us back a couple of years in terms of advancement in in this in this space.
Sarah Thompson
Super interesting. Maybe I can jump in here and offer some perspectives on the Canadian context as well. So disclosure related here in Canada, we saw the Canadian Sustainability Standards Board introduce Sustainability Disclosure Standards in December. But we also have, what we refer to as Bill C59, which is introducing new legal risks related to sustainability disclosure, so more tensions for issuers or companies to navigate. So with regard to Bill C59 we're seeing the impacts this is related to anti-greenwashing amendments that were made to our Competition Act last year, and those impacts are really coming into play now. In short, companies can't make public claims about the environmental impacts of either their business or their products unless they can prove it in accordance with an internationally recognized methodology. And unfortunately, as we will know, there aren't always internationally recognized methodologies that exist in this space, it's still relatively nascent, and furthermore, the concept or the definition of internationally recognized methodologies is not clear or well defined in the legislation. So unfortunately, this does introduce legal risk for companies when disclosing their sustainability performance, and we'll better understand how that manifests as the year progresses. What I would say is that we expect companies to take an increasingly pragmatic approach, to really emphasize that long term economic value creation and to closely align their sustainability initiatives with their core business activities, where, where they will really drive that value or that competitive advantage. So in some cases this might mean scaling back on targets, it might mean more targeted investments, or it might mean smaller, more focused initiatives. But. I think all of this will be with a view to maximizing impact and really driving real world outcomes, which I think is ultimately a really good thing and a really important thing, and the sign of a maturing market. So let's shift focus, Stefano, can you describe for us how this evolving regulatory situation in the EU combined with heightened geopolitical risks and the threat of tariffs, how all of that is impacting responsible or sustainable supply chain considerations?
Stefano Vitale
Absolutely, this is an extremely complex topic, so I'll try to give some highlights. We already mentioned the impact that the omnibus will have on small and medium enterprises disclosures on sustainability in Europe. And that plays a key role in in the supply chain, as clearly, 99% of European companies are effectively SMEs. So the fact that large companies as well as financial institutions are losing the visibility on ESG reporting, is going to be extremely impactful. What I can say is that there are regional regulations already in place, I'm thinking France and Germany, that nonetheless impose some form of disclosure, which may, here and there, support the lack of data, but ultimately, large companies have been pushing back. Supply chain risk will continue to be to be top of mind despite the lack of data. Apart from a handful of sectors that are energy intensive, and I'm thinking utilities, metal producers, cement and agriculture, the rest is pretty much showing more than 80% their carbon footprint being derived from their supply chain. So clearly, even if you only focus on the net zero targets that some of these large companies have, this tells you that they will have to engage with their supply chain in some way or another, at the very least, to map their carbon footprint. Human rights is another topic. The EU taxonomy speaks about minimal social safeguards that needs to be met for green activities to be recognized as eligible, and that speaks to effectively the implementation of human rights throughout the value chain. Ultimately, if we think about solutions to tackle that we do anticipate that more companies will start using technology solutions to really help them keep track and the report on these activities, especially from supply chain, and this will be a factor test for AI, in my mind, as they will be trying to bridge that gap in terms of data availability and estimating the data for supply chains.
Sarah Thompson
Another theme that we saw really gathering momentum in 2025 is this dual role that AI will really play in the energy transition by significantly increasing data center energy demand, while also driving resource efficiency and decarbonization efforts across the broader economy. And this is really interesting, and I think this is what leads us to see AI as potentially a force for decarbonization. The large tech companies, including the hyper scalers that have some of the most ambitious corporate sustainability and corporate climate commitments out there. And addressing data center emissions will be essential to achieving those commitments. And from everything that we've seen to date, those companies, those tech companies and those hyper scalers remain very committed and, they have done so mainly by pulling on two key levers, and we think they'll continue to do that to help achieve those emissions reductions that they need to see. One lever is scaling alternative low carbon sources of energy to meet that rising energy demand from data centers, and the other will be investing in carbon removal solutions to help decarbonize total energy consumption. So as far as scaling alternative low carbon sources of energy goes, we've seen some interesting developments in this space, including a nuclear energy renaissance. We saw at COP28, 20 major countries pledged to triple nuclear energy generation capacity by 2050, and we're seeing nuclear energy now is part of many energy strategies. We've seen that manifest too in the sustainable debt market, particularly with a number of Canadian and US issuers raising proceeds through green bonds to fund nuclear energy related projects. And I think there's a really interesting opportunity here for small modular reactors to play in terms of meeting some of that additional demand being driven from data centers and AI, even if we maybe don't expect those solutions to be fully commercial until the 2030s. And then I mentioned the other lever, which is investing in carbon removal solutions. So I think we have to acknowledge that this increase in in data center energy demand will need to be met by all forms of energy, including hydrocarbon energy. And so I think this is why the tech players are focused also on carbon dioxide removal solutions, and those will definitely be needed at scale; so they are playing a key role, helping to fund and commercialize some of those solutions, and in doing so, I think that the rest of the economy will benefit. It is, after all, much easier, I think, to scale in a growth cycle than when demand is flat. So that perhaps segues nicely to our next theme. What Moses are we seeing in the way of increased adoption of innovative financing mechanisms for sustainability solutions broadly. Can you talk to us about perhaps, some of the ways in which you're seeing capital being mobilized?
Moses Choi
Maybe just starting on the more on the capital market side, 2024 was a record year for green bond issuance globally, with $618 billion worth of green bonds issued. The proceeds, of course, go to finance or refinance things like renewable energy investments, green buildings, energy efficiency. And I think what gives us more optimism is that the industry guidance has also widened the opportunity for issuers to come to market from hard to abate sectors. It's worth noting that RBC published our recent global ESG fixed income survey with responses from over 55 institutional investors, and overwhelmingly, they tell us that they have resilient demand for labeled sustainable debt with a particular interest in green bonds. I'd say, at the same time we see that private markets will undoubtedly play a very key role for climate solutions. We saw $47 billion of new capital allocated to early stage and growth GPs last year. And in just Q1 this year alone, almost $18 billion of net new assets went into private climate funds driven largely by mega funds and financial sponsors focused on energy transition. We certainly have great coverage of those types of institutions at RBC through our investment banking and energy transition teams. And RBC is also investing our balance sheet to support the development and scaling of innovative climate solutions. Sarah, you talked a little bit about AI and, one of the trend lines that we're seeing is that there is continued investment in AI centered startups that are focused on climate and, interestingly enough, $1 billion more of venture capital in 2024 was funded in these types of startups than in ’23, totaling $6 billion dollars. I'd wrap up my comments here by just underscoring for the audience that climate investing today is much more resilient than what we went through as the clean tech 1.0 wave in the 2000s. Slower development has led to dry powder pile up, but it's also meant that investors are taking a sharper focus on funding companies with strong fundamentals and that are capital efficient. I think with that, we're going to see more and increased collaboration with blended finance structures using catalytic capital from public or philanthropic sources. And we remain optimistic that carbon markets will continue to play an important role, helping companies achieve their decarbonization ambitions.
Sarah Thompson
That brings us to our fifth and final theme, which focuses on the amplified physical climate risk that we're seeing sort of play out across the world and the real economy impacts. I think 2024 set a record for being the hottest year, and it was also the first calendar year to exceed the Paris Agreement's one and a half degrees Celsius target. So as the number of billion dollar disasters continues to rise, and the impacts to the real economy continue to mount, how are different sectors responding to the increased physical risks of climate change?
Stefano Vitale
Physical climate risk will be really top of mind in 2025 and going forward, to a lot of investors. Apart from the fact that it's a bipartisan topic, so that clearly helps in certain jurisdictions, it's really becoming a major issue. But how are different industries responding? I would say maybe we can focus first of all on utilities. Those are the ones that are really putting a lot of effort in trying to invest in resilience, specifically around making the grid resilient to various types of climate change, impact and risks. Here in Europe, we have seen a surge in expenditure specific to the scope and there are similar trends happening globally. We have seen, effectively, investments in climate change adaptation, not really topping the priority list in the in the past few years, but the trend is changing just. Today, roughly 14% of green bonds issued as some form of investment related to climate change of patients, whilst 53% are focused on green buildings. And if you think about it, the real assets and real estate sector is, alongside infrastructure sector, one of the of the ones that is broadly exposed to these risks, and in fact, their ability to integrate climate risk considerations in the way they buy assets, sell assets and build assets is going to become a major point of concern going forward, especially when you link that to another sector, which is the insurance space. Insurance models are increasingly integrating climate models in the way they assess risk, and looking beyond the 12-24 months horizon, more toward the 10-20 years horizon when assessing these risks. And they've also figured out solutions to spread these risks within the market, in the sense that through, for example, catastrophe bonds, they have been able to transfer this risk to investors that have specific appetite for catastrophe risk. Efficiencies in the market can ultimately help curb the impact of climate change outside of the scope of the more traditional sustainable finance that we've seen deployed up till today.
Sarah Thompson
Thank you, Stefano and Moses, that was a really great discussion of the key sustainability themes that we see playing out in 2025 and beyond. And for listeners who would like more information or more detailed analysis, I would encourage you to check out our themes for 2025 report, the link to which can be found in the show notes for this podcast episode. As we know, the only thing constant is change, and our Sustainable Finance Group is here to help clients navigate this increasingly complex and dynamic landscape with very practical advice and solutions. Thank you so much for listening to Powering Sustainable Ideas, brought to you by RBC Capital Markets. Please remember to subscribe to get more great content and be alerted about future episodes. This episode was recorded on Friday, March the seventh. If you'd like to learn more or continue the conversation, please visit rbccm.com/poweringsustainableideas, or contact your RBC representative. See you next time.